Do You Buy the Bull Case on Stock Buybacks?

Stock buybacks are returning with fervor to the U.S. equities market this year, but it's never been an open and shut case at to whether buybacks are a winning corporate strategy.
Author:
Publish date:

NEW YORK (

TheStreet

) -- Investors don't like it when C-Suite executives dump their insider shares in large quantities -- yet many investors frown upon the stock buyback by a company, when it could increase dividends or use the cash for expansion.

For every insider transaction that actually is a bear call by a CEO on his company's shares, there is an example from the world of stock buybacks allowing critics to say that share repurchases are just a convenient way for C-suite executives to manage their stock-options packages.

Nevertheless, stock buyback activity has surged back in 2010 -- off a memorably (but forgettable) low level in 2009 -- providing some indications that corporations are at least a little more comfortable spending this cash.

The king of the buyback in the S&P 500 universe this year is

Texas Instruments

(TXN) - Get Report

, at least as far as measuring stock buyback plans as a percentage of outstanding shares. Texas Instruments announced a buyback program for 25% of its shares.

Wal-Mart

(WMT) - Get Report

set a record in the second quarter of this year with its level of buybacks, over $4 billion. The consumer giant also authorized a new $15 billion buyback plan this year.

>>Top 10 S&P 500 Stock Buybacks in 2010

Hewlett-Packard

(HPQ) - Get Report

,

Microsoft

(MSFT) - Get Report

and

PepsiCo

(PEP) - Get Report

have all been in the news for issuing debt in part to raise money for share repurchases.

Some of the biggest stock buybacks announced this year didn't even realize at the time how much their stock might need some support, for example,

Transocean

(RIG) - Get Report

.

The pertinent question for the investor is whether the stock buyback is really the best use of cash, even when it's clearly being done by management to support shares and give a boost to EPS. Many investors prefer dividends to multi-year buyback programs, or seeing the management of the companies they are investing in investing in growth plans.

Outside the S&P 500, three of the 10 biggest stock buyback programs --

Fossil

(FOSL) - Get Report

,

Herbalife

(HLF) - Get Report

and

URS Corp.

(URS)

-- represented at least 20% of outstanding shares. Typical stock buyback programs range from 5% to 100% of outstanding shares. Most importantly, three of the four biggest stock buybacks outside the S&P 500 universe have all been announced within the past month.

Proponents of the buyback programs argue that it's a good macroeconomic sign: companies are getting their feet wet again in freeing up large cash balances, and while they may not be spending on dividends, hiring or mega-acquisitions, the buyback activity could be a pre-cursor to all of those options.

Are corporations taking baby steps before becoming more aggressive, growing the share price in short-term increments before growing their businesses to generate long-term earnings power? Or are they being too conservative by focusing cash and debt raises on the stock buyback as opposed to expansion?

Indeed, the return to life of the stock buyback in 2010 raises the question for investors: Do you like what you are seeing in terms of the renewed focus on share repurchase programs from U.S. corporations? Take our poll below, and see what

TheStreet

has to say.

--Written by Eric Rosenbaum in New York.

>To contact the writer of this article, click here:

NAME

.

>To follow the writer on Twitter, go to

http://twitter.com/erprose

.

>To submit a news tip, send an email to:

tips@thestreet.com

.

RELATED STORIES:

>>Top 10 S&P 500 Stock Buybacks in 2010

Copyright 2009 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.